The Trump Administration is claiming China’s government forces American companies to relinquish its IP to China. Having worked on hundreds of China transactions that involve IP, I view things rather differently.
I have never been involved in a China transaction where it has been clear that the Chinese government has forced our client to relinquish its IP to China. I have though been involved in many transactions where the Chinese party on the other side — often State Owned Entity — has vigorously and aggressively sought to steal my client’s IP or get my client to part with its IP for a low price. Is the Chinese government behind this sort of pressure? Probably quite often it is. If the transaction involves rubber duckies, we can assume it is not. If it involves next generation computer chips, it almost certainly is.
As we so often write on here, there are many terrible technology transfers and other sorts of IP deals to be had with Chinese companies. I have seen way too many companies make bad deals that involve them turning over their IP to a Chinese company with little to no chance of receiving full value for it — even against my advice. But these companies have not been forced to do so, at least not in the sense that any government forced them to do anything. These companies were simply willing to take huge risks because they could not grasp the risks they would be taking or because they felt they had no other choice for financial reasons.
A Chinese company that intends to violate a licensing agreement and run off with a foreign company’s IP will usually have a clear plan. What the China IP lawyers in my office call the Standard Plan works as follows. First, the Chinese company will negotiate in a way that guarantees a weak license that cannot be enforced against them by the foreign party. The tricks used to do this are quite standardized. Second, the Chinese company will ensure that it does not make any (or else it makes very few) payments until after it has already received the technology. If the Chinese company makes any payment at all, it will make a minimal number of payments, usually late and in violation of the agreement and then once it has received enough of the technology it seeks, it will cease making any payments entirely.
When our China attorneys encounter a Chinese company clearly working on the Standard Plan, we warn our clients. However, it is also typical for our clients to nonetheless want to forge on ahead. The client will usually explain how their situation is unique and that means the Chinese could not possibly be planning to breach.
In China Technology Transfers: Relationship and Deal Myths we discuss how companies lose their IP to Chinese companies and we again leave out government force:
Due to a partnership relationship, the foreign side often wrongly believes it is somehow better protected against IP theft. The foreign side then lets down its guard, only to learn that its China partner has appropriated its core technology. This sense of partnership is most common with SMEs and technology startups, especially those companies whose owner is directly involved in the relationship with the Chinese entity.
In China and The Internet of Things and How to Destroy Your Own Company I rant about technology companies that literally destroy themselves by failing to do enough to protect their IP from China:
Well for what it is worth, I will no longer describe technology companies as our dumbest clients when it comes to China. No, that honor now clearly belongs to a subset of technology companies: Internet of Things companies. And mind you, we love, love, love Internet of Things companies. For proof of this, just go to our recent post, China and the Internet of Things: A Love Story. Internet of Things (a/k/a IoT) companies are sprouting all over the place and they are booming. Most importantly for us, they need a ton of legal work because just about all IoT products are being made in China, more particularly, in Shenzhen. And just about all IoT products need a ton of complicated IP assistance.
So then why am I saying they are so dumb about China? Because they are relinquishing their intellectual property to Chinese companies more often, more wantonly, and more destructively than companies in any other industry I (or any of my firm’s other Chinese lawyers) have ever seen. Ever. And by a stunningly wide margin.
I then list out the following as “my prime example, taken from at least a half dozen real life examples in just the last few months”:
IoT Company: We just completed our Kickstarter campaign and we totally killed it and so now we are ready to get serious about protecting our IP in China.
One of our China Lawyers: Great. Where are you right now with China?
IoT Company: We have been working with a great company in Shenzhen. Together we are working on wrapping up the product and it should be ready in a few months.
China Lawyer: Okay. Do you have any sort of agreement with this Chinese company regarding your IP or production costs or anything else?
IoT Company: We have an MOU (Memorandum of Understanding) that talks about how we will cooperate. They’ve really been great. They have told us that they would enter into a contract with us whenever we are ready.
China Lawyer: Can you please send us the MOU? Have you talked about what that contract will say?
IoT Company: Sure, we can send the MOU. It’s one page. No, we haven’t really talked much beyond just what we need to do to get the product completed.
China Lawyer: Okay, we will look at your MOU and then get back to you with our thoughts.
Then, a day or two later we a conversation like the following ensues:
China Lawyer: We looked at your “MOU” and we have bad news for you. We think there is a very good chance a Chinese court would view that MOU as a contract. (For why we say this, check out China LOI and MOU: Don’t Let Them Happen to You) And the Chinese language portion of the MOU — which is all that a Chinese court will be considering — is very different from the English language portion. The Chinese language portion says that any IP the two of you develop (the IoT company and the Chinese manufacturer) belongs to the Chinese company. So what we see is that as things now stand, there is a very good chance the Chinese company owns your IP. This being the case, there is no point in our writing a Product Development Agreement because your Chinese manufacturer is not going to sign that.
IoT Company: (And I swear we get this sort of response at least 90 percent of the time) I’m not worried. I think you have it wrong. I’m sure that they will sign such an agreement because we orally agreed on this before we even started the project.
China Lawyer: That’s fine, but I still think it makes sense for you to at least make sure that the Chinese company will sign a new contract making clear that the IP associated with your product belongs to you, because if they won’t sign something that says that, there is no point in our drafting such a contract and, most importantly, there is no point in your paying us to do so.
So far, not a single such IoT company has been able to come back to us with an agreement from their Chinese manufacturer to sign.
Again, no government force, just an overzealous and insufficiently careful foreign company.
Now before anyone excoriates me for ignoring reality, let me say I have read about instances where the Chinese government has forced foreign companies to turn over their IP to China. High speed rail is an often cited example of that. And I do not doubt that it happens in critical industries — nuclear power would be another example. And I am also aware of how China is increasingly forcing foreign companies to store their data in China, which absolutely puts technology at risk. But even in these instances the foreign company has some choice. Not good choices, I know. And arguably it is no choice at all when the decision is between doing business in China or not. The last thing I want to do is get all philosophical on anyone regarding what constitutes choice so I will leave it to our individual readers to determine for themselves where on the continuum of force and choice they want to put any and all of the above.
There is plenty to complain about how China protects IP and there is plenty to complain about how China protects foreign companies that do business in China or with China, but I am just not sure complaining about forced IP transfers goes at the top of that list for most American companies. When I talk with American and European and Australian companies about China, their biggest legal complaint is invariably how expensive it is for them to comply with China laws and how they resent that their Chinese competitors generally are not held to the same legal standards.
A couple of years ago, I gave the following testimony before The US-China Economic and Security Review Commission of the United States Congress:
I was introduced as an expert, and I’d like to qualify that by saying do not think of myself as an expert. I am just a private practice lawyer who represents American [including Latam] and Australian companies and European and Canadian companies in China.
I’m going to tell you a little bit about what we do so you can get a little bit better perspective of where I’m coming from on this. The bulk of my firms’ clients are small and medium-size businesses, mostly American businesses, but some European and Australian and Canadian businesses as well. Most of them have revenues between 100 million and a billion a year. Our clients are mostly tech companies, manufacturing companies and service businesses.
About 20 percent of our work is for companies in the movie and entertainment industry. We have some clients in highly-regulated industries, like health care, senior care, banking, insurance, finance, telecom and mining, but those companies make up less than ten percent of our client base.
Most of the China work we do for our clients is relatively routine. We help them register as companies in China. We register their trademarks and copyrights in China. We draft their contracts with Chinese companies. We help them with their employment, tax and customs matters. We oversee their litigation in China, and we represent them in arbitrations in China. We help them buy Chinese companies.
For our clients, the big anti-foreign issue is whether they will be allowed to conduct business at all in China as that is certainly not always a given. Certain industries in China are shut off or limited to foreign businesses acting alone. For our clients, publishing and movies are most prominent.
Essentially anything that might allow for nongovernmental communication to or between Chinese citizens is problematic, but it is not clear to me that these limitations are intended to be anti-foreign, as China does not really want any private entities, foreign or Chinese, engaging in these activities without strict governmental oversight.
So do these limits against foreign companies arise from anti-foreign bias or just the Chinese government’s belief that it can better control Chinese companies? To our clients, that distinction doesn’t matter.
On day-to-day legal matters, our clients are almost invariably treated pursuant to law, and so long as they abide by the law, they seldom have any problems. The problem for our clients isn’t so much how the Chinese government treats them; it’s how they are treated as compared to their Chinese competitors who are less likely to abide by the laws and more likely to get away with it.
I have no statistics on this. I doubt there are any statistics on this, but I see it and I hear it all the time.
I see it when one of our clients buys a Chinese business that has half of its employees off the grid and has facilities that are not even close to being in compliance with use laws, and I know foreign companies cannot get away with that.
And I hear it from Chinese employees of our clients who insist that there is no need for our clients to follow various laws. They insist there is no need to follow various laws and to do so is stupid. Is this disparity due to anti-foreign bias or is it due to corruption? Again, for our clients, the answer is irrelevant.
CNN recently interviewed me for their article, President Trump is set to crank up the pressure on China over trade:
Beijing has other ways of getting its hands on valuable commercial information. Officials often insist on taking a close look at technology that foreign companies want to sell in China.
“Chinese government authorities jeopardize the value of trade secrets by demanding unnecessary disclosure of confidential information for product approvals,” the American Chamber of Commerce in China said in a report published in April.
Some experts say that handing over technology has effectively become a cost of doing business in China — a market too big for most companies to ignore.
“Many Chinese companies go after technology hard and the tactics they use show up again and again, leading us to believe there is some force (the government?) teaching them how to do these things,” said Dan Harris, a Seattle-based attorney who advises international companies on doing business in China.
“The thing is that the foreign companies that give up their technology usually do so at least somewhat of their own volition,” he told CNNMoney. “Yes, maybe they need to do so to get into China, but they also have the choice not to go into China, right?”
Closing the stable door?
Other analysts say that the U.S. administration is coming to the problem too late.
“Intellectual property (IP) theft is yesterday’s issue,” wrote Lewis of the Center for Strategic and International Studies.
“In part because of past technology transfer and in part because of heavy, sustained government investment in science and research, China has developed its own innovative capabilities,” he wrote.
“Creating new IP in the United States is more important than keeping IP from China.”
These are complicated issues and I realize the above is more of a stream of consciousness “thoughts dump” than a coherent position paper. So more than ever, I’d love to hear your thoughts in the comments below.